SMSF uses a bare trust to borrow with cheaper interest rates

I understand that the trustee of SMSF can enter "“limited recourse borrowing arrangement” agreement with the trustee of a bare trust to borrow for purchase of IP.

Because SMSF fund is insufficient, I am wondering if I, as a beneficial owner of SMSF, can use my own money (i.e. salary income) to lend to SMSF trustee a portion of IP purchase money?

For example:

SMSF money: $250,000
My money lends to bare trust: $150,000 <-- is this allowed?
Bank lends to bare trust $700,000
------------------------

Total Acquisition Cost: $1,000,000

 

Who knows. Specific super, tax and credit advice are best. A bank wont lend to a bare trust as proposed. One lender is only is allowed

 

Likely to have issues as uncommercial

 

Can't you make Non Concessional Contribution (NCC) of $100K and $50K with bring forward rule into SMSF instead?
I doubt the commercial lender will lend that much based on the balance of only $250K. Also you may need 10% liquidity in the SMSF to be left.
Speak with your accountant and broker to receive the proper advice!

 

@MWI I can make Non Concessional Contribution (NCC) but I cannot take money back for use in other purposes. Above is my example. Not my real money amount. Just assume that there is10% liquidity in SMSF.

I would like to have a background info before engaging with accountant/broker.

@Terry_w I use SMSF to buy a commercial property. Can I lend to the trustee of bare trust or the trustee of SMSF?

 

LRBAs can have restrictions around single drawdown and single acquirable asset etc.

SMSF lending space is a niche with not a whole lot of options out there. Consider the effect of personal guarantees on your servicing outside SMSF, some Banks don't care and some want to include the whole lot.

Already have an SMSF? In any case, talk to @Terry_w , @Paul@PFI or @Redwood to get started. Very easy to get this wrong and the penalties can be severe.

 

You can lend the custodian trust - potentially. Seek legal advice first

 

Thanks @Terry_w

 

There are very strict related party lending rules v bank loans. You cant do both. If there is equity available to the member in the property or other property !!!! a related party loan might work. If not. Forget it.

Commercial loans will NOT have a 80% lvr

 

Yes - There can be a range of factors to consider eg Lender dies. Divorce, sued etc. Related party loans have some issues with expectancy of the arrangement continuing unlike a mainstream lender who may withdraw from market but will maintain the loan (eg AMP / STG, WBC etc). Could lead to a sale of the asset. When I advise on these issues I get a sign off that the SMSF advice contained these limits as I can see advisers in the firing sights in future years if its not addressed. Its easy to overlook the credit advice issue in a related party arrangement and some buyers want to race into it and wont necessarily see the risks even when its discussed. Blows up later.

 

@MWI - may I please ask what is this 10% liquidity rule in the SMSF ? 10% of what ? Property?

TIA

 

No of all your assets in SMSF. In case your property runs into trouble you may need extra funds that you did not foresee? I think most SMSF strategists recommend that, it not official rule I think?

 

Lender requirement typically

 

Thanks Lindsay_W.
Agree in external commercial loan arrangements but under LRBAs one may need to plan for it too.

 

Hi @Lindsay_W , If the property in SMSF is a cash purchase can we take the loan against it from lenders who deal in SMSF space by setting up bare trust?

 

prohibited under super law

 

Unfortunately no, the rules are pretty strict on what you can and can't do with SMSF Lending, for example you can't use equity in the existing property for deposit and costs of another IP in the SMSF unlike normal investment lending.

 

Thanks guys....i was reading someplace where Director can lend/loan the funds to SMSF- how.does that work then? Unless, I am missing something?

 

This would still be illegal. A SMSF trustee can only borrow to acquire an asset. once its owned its too late. But refinancing an existing loans is possible.